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Costly Disasters and the Role of Fiscal Policy: Evidence from US States

Author

Listed:
  • Fabio Canova
  • Evi Pappa

Abstract

We examine the dynamic effects of natural disasters in US states and relate them to state and federal fiscal policy. Disasters have significant negative output but less severe unemployment consequences. Real effects vary spatially: coastal and poor states recover more slowly. States with less stringent budgetary requirements and/or rainy day funds have insignificant real costs and negligible debt consequences. Countercyclical fiscal policy reduces the severity of the real downfall. Both federal and state governments respond to the disaster shock and aid by the former helps to lower the short run costs on state debt. The ability of states to run deficits and temporarily increase debt is a key factor in the recovery.

Suggested Citation

  • Fabio Canova & Evi Pappa, 2021. "Costly Disasters and the Role of Fiscal Policy: Evidence from US States," European Economy - Discussion Papers 151, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:dispap:151
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    File URL: https://economy-finance.ec.europa.eu/publications/fellowship-initiative-2020-2021-costly-disasters-and-role-fiscal-policy-evidence-us-states_en
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    Cited by:

    1. Haroon Mumtaz & Fulvia Marotta, 2023. "Vulnerability to Climate Change: Evidence from a Dynamic Factor Model," Working Papers 961, Queen Mary University of London, School of Economics and Finance.
    2. Matteo Ciccarelli & Fulvia Marotta, 2021. "Demand or Supply? An empirical exploration of the effects of climate change on the macroeconomy," Working Papers 933, Queen Mary University of London, School of Economics and Finance.

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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